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Tax Credit Information

Homebuyer Tax Credit Extended and Expanded

As part of its plan to stimulate the U.S. housing market and address the economic challenges facing our nation, Congress has passed new legislation that:
---Extends the First-Time Home Buyer Tax Credit of up to $8,000 to first-time home buyers until April 30,2010.
---Expands the credit to grant a $6,500 tax credit to current home owners purchasing a new or existing home between November 6, 2009 and April 30, 2010.

Here is more information about how the Extended Home Buyer Tax Credit can help prospective home buyers become part of the American dream:
Who Qualifies for the Extended Credit?
First-time home buyers who purchase a home between November 6, 2009 and April 30, 2010. To qualify as a “first-time home buyer” the purchaser and his/her spouse may not have owned a residence during the three year period prior to the purchase.
Who Qualifies for the Expanded Credit?
Buyers must have owned and lived in their previous home for five consecutive years out of the last eight years. The new Move-Up/Repeat Home Buyer Tax Credit gives qualified homeowners a tax credit of up to $6,500, and it is effective as of November 6, 2009.

$8,000 First-time Home Buyer Tax Credit at a Glance

Who Qualifies? The $8,000 tax credit is for first-time home buyers only. For the tax credit program, the IRS defines a first-time home buyer as someone who has not owned a principal residence during the three-year period prior to the purchase.

What is the Timeframe? The tax credit now applies to sales occurring on or after January 1, 2009 and on or before April 30, 2010. However, in cases where a binding sales contract is signed by April 30, 2010, a home purchase completed by June 30, 2010 will qualify.

How Much Is the Tax Credit? The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $8,000.

What Were the Income Limits? For homes purchased on or after January 1, 2009 and on or before November 6, 2009, the income limits are $75,000 for single taxpayers and $150,000 for married couples filing jointly.

What Are the New Income Limits? For homes purchased after November 6, 2009 and on or before April 30, 2010, single taxpayers with incomes up to $125,000 and married couples with incomes up to $225,000 qualify for the full tax credit.

Please Note: Married couples are not eligible to claim the first-time home buyer tax credit if either spouse has previously owned a home. They may, however, qualify for the repeat home buyer tax credit.

$6,500 Move-Up / Repeat Home Buyer Tax Credit at a Glance

Who Qualifies?: The law defines a tax credit qualified move-up home buyer (“long-time resident”) as a person who has owned and resided in the same home for at least five consecutive years of the eight years prior to the purchase date. For married taxpayers, the law tests the homeownership history of both the home buyer and his/her spouse. Repeat home buyers do not have to purchase a home that is more expensive than their previous home to qualify for the tax credit.

What is the Timeframe?: The credit is available for homes purchased after November 6, 2009 and on or before April 30, 2010. However, in cases where a binding sales contract is signed by April 30, 2010, the home purchase qualifies provided it is completed by June 30, 2010.

How much is the Tax Credit?: The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $6,500.

What Are the Income Limits?: Single taxpayers with incomes up to $125,000 and married couples with incomes up to $225,000 qualify for the full tax credit. The amount of the tax credit decreases as income levels approach the maximum limit which is $145,000 for single taxpayers and $245,000 for couples. Anyone earning above the maximum limit is not eligible for the tax credit.

Tax Credit FAQs

What types of homes will qualify for the tax credit?

Any home that will be used as a principal residence will qualify for the credit, provided the home is purchased for a price less than or equal to $800,000. This includes single-family detached homes, attached homes like townhouses and condominiums, manufactured homes (also known as mobile homes) and houseboats. Vacation homes and rental property purchases do not qualify. The definition of principal residence is identical to the one used to determine whether you may qualify for the $250,000 / $500,000 capital gain tax exclusion for principal residences.

It is important to note that you cannot purchase a home from, among other family members, your ancestors (parents, grandparents, etc.), your lineal descendants (children, grandchildren, etc.) or your spouse or your spouse’s family members. Please consult with your tax advisor for more information. Also see IRS Form 5405.

Must the Tax Credit be Paid Back?

The tax credit does not have to be repaid unless the home is sold or ceases to be used as the buyer’s principal residence within three years after the initial purchase. In those cases, the full amount of the tax credit will be recouped on the sale.

Is the Tax Credit Refundable?

Yes. A refundable credit means that if the amount of incomes taxes you owe is less than the credit amount you qualify for, the government will send you a check for the difference.

Example 1: A first-time home buyer who qualifies for the full $8,000 credit who owes $5,000 in federal income taxes who pay nothing to the IRS and receive a $3,000 payment from the government. If the home buyer was due to receive a $1,000 refund, he/she would receive $9,000 ($1,000 plus the $8,000 tax credit).

Example 2: A repeat buyer (current home owner) who qualifies for the full $6,500 credit who owes $5,000 would pay nothing to the IRS and receive $1,500 back from the government. If the repeat buyer was due to receive a $1,000 refund, he/she would receive $7,500 ($1,000 plus the $6,500 credit).

Is a tax credit the same as a tax deduction?

No. A tax credit is a dollar-for-dollar reduction in what the taxpayer owes. That means that a taxpayer who owes $6,500 in income taxes and who receives an $6,500 tax credit would owe nothing to the IRS.

A tax deduction is subtracted from the amount of income that is taxed. Using the same example, assume the taxpayer is in the 15 percent tax bracket and owes $6,500 in income taxes. If the taxpayer receives a $6,500 deduction, the taxpayer’s tax liability would be reduced by $975 (15 percent of $6,500), or lowered from $6,500 to $5,525.

How do I claim the tax credit? Do I need to complete a form or application? Are there documentation requirements?

You claim the tax credit on your federal income tax return. Specifically, home buyers should complete IRS Form 5405 to determine their tax credit amount, and then claim this amount on line 67 of the 1040 income tax form for 2009 returns.

No other applications are required, and no pre-approval is necessary. However, you will want to be sure that you qualify for the credit under the income limits and repeat home buyer tests. Note that you cannot claim the credit on Form 5405 for an intended purchase for some future date; it must be a completed purchase. Home buyers must attach a copy of their HUD-1 settlement form (closing statement) to Form 5405 as proof of the completed home purchase.

If I’m qualified for the tax credit and buy a home in 2010, can I apply the tax credit against my 2009 tax return?

Yes. The law allows taxpayers to choose (“elect”) to treat qualified home purchases in 2010 as if the purchase occurred on December 31, 2009. This means that the previous year’s income limit (MAGI) applies and the election accelerates when the credit can be claimed. A benefit of this election is that a home buyer in 2010 will know their prior year MAGI with certainty, thereby helping the buyer know whether the income limit will reduce their credit amount.

Taxpayers buying a home who wish to claim it on their prior year tax return, but who have already submitted their tax return to the IRS, may file an amended return claiming the tax credit using Form 1040X. You should consult with a tax professional to determine how to arrange this. If the applicable income phaseout would reduce your home buyer tax credit amount in the present year and a larger credit would be available using the prior year MAGI amounts, then you can choose the year that yields the largest credit amount.

What else should I know about the Tax Credit?

All qualified home buyers can take the tax credit on their 2009 or 2010 income tax returns. Persons who are claimed as dependents by a taxpayer, who are under age 18, or who are relatives of the current owner do not qualify for a tax credit. Taxpayers must submit a copy of the HUD-1 settlement statement and IRS Form 5405 to claim either of the tax credits.

I owned my home for 10 years, but sold it two years ago. I have been renting since. If I purchase a home, will I be eligible for the $6,500 tax credit if I meet all of the other eligibility tests?

Yes. Because you lived in the home for more than 5 consecutive years of the previous 8, you will qualify for the $6,500 credit. For example, let’s say John and his wife bought a home in 2000 and lived there until 2008 when they divorced. Whether John has been renting or bought in the interim, he WOULD INDEED be eligible for the credit because he owned a home and occupied it as his principal residence for 5 CONSECUTIVE YEARS out of the last 8 years. The keyword is “consecutive.” As long as he lived in that house for 5 straight years during the last eight, what he has done in the last three years would not impact his eligibility.